09/08/2010

Business Litigation Alert: FASB Proposed Standards Could Significantly Affect Companies

The Financial Accounting Standards Board (FASB) is proposing a change to generally accepted accounting principles that could have a significant effect on companies. The proposed change is known as Topic 450, or Disclosure of Certain Loss Contingencies. This proposed change is one that ultimately was not approved when first proposed by the FASB in 2008. 

The FASB's proposed changes would require public and non-public entities to disclose certain information at the onset of, and throughout the life-cycle of, litigation or other adjudicative proceedings. The proposed standards require, in part, that "An entity shall disclose qualitative and quantitative information about loss contingencies to enable financial statement users to understand all of the following:

a. The nature of the loss contingencies
b. Their potential magnitude
c. Their potential timing (if known)."

The proposed changes can be viewed at the FASB's website.

The Association of Corporate Counsel (ACC), a 25,000-member association of in-house counsel, has voiced its strong opposition to these proposed changes. In a letter written to the FASB on August 18, 2010, the ACC indicated three primary reasons why the proposed changes should not be implemented:

1. The proposed requirements for disclosure of accrual amounts would harm company and shareholder interests in litigation and could create tension surrounding attorney-client privilege and work-product protection issues
2. The proposed disclosures would mislead financial statement users and drive litigation outcomes to the detriment of companies and their shareholders
3. An exemption for the disclosure of prejudicial information is needed.

The ACC letter was signed by 100 legal officers at well-known U.S. companies.

Stinson Morrison Hecker will continue to monitor the proposed changes. For additional information regarding our litigation resources, please contact John Munich, Sean Colligan, or any of our Business Litigation attorneys for more information.